Archive for the ‘Job Blackmail’ Category

Bob Fulkerson of the Progressive Leadership Alliance of Nevada and Greg LeRoy of Good Jobs First issued the following statement regarding reports that Tesla plans to announce it has chosen Nevada for its “gigafactory,” or massive electric-car battery factory.

This is a huge event in Nevada history. If the taxpayer subsidy package for the facility is $500 million or more, as Tesla has demanded, it would be the biggest subsidy package in Nevada history by a factor of more than five. (There is only one recorded eight-figure deal in Nevada history and none over $89 million.)

The announcement only raises more questions:

Was the five-state auction all just a charade to extract bigger subsidies from the state Tesla had already chosen? (Tesla broke ground in an industrial park in Reno, Nevada in July.)

If it was a charade, does that mean Tesla doesn’t need any Nevada subsidies because the business basics drove the project to Reno (which has good access to key material inputs and is also close to Tesla’s assembly facility in Fremont, California)?

When will the full details of the proposed Nevada subsidy package be released to the public? How many days will Nevada taxpayers have to weigh the costs versus the benefits before the legislature votes on the deal?

Will Tesla agree to the Good Jobs First/MoveOn petition demand and allow all five states’ commerce agencies to immediately release their Tesla project files so that taxpayers can see how seriously Tesla considered the other states and how much in subsidies each state offered?

Exactly how does Tesla’s claim of 6,500 new jobs break down? How many would be temporary construction jobs? How many would be permanently directly employed by Tesla? How many would be associated with unnamed suppliers? (Tesla and Panasonic’s joint July 31 press release says half the space will be occupied by suppliers.) Are any of the 6,500 projected jobs indirect or so-called “ripple effect” jobs?

How good will the Tesla jobs be? What will be the median wage for non-managerial production workers? What will the benefit package consist of?

Will Nevada taxpayers be protected by “clawback” language that would require Tesla to refund some or all of the subsidies (and/or lose future subsidies) if the deal fails to deliver all of the promised jobs?

How many of the engineering and other highly-paid jobs at the plant will be filled by people who will move to the Reno area from out of state?

Until these questions are answered, Nevada taxpayers will remain in the dark. Without answers, no one will be able to judge if Nevada elected officials are overspending for a trophy deal.

A stunning survey issued today by the International Economic Development Council (IEDC) proves that state and local economic development officials overwhelmingly agree with most accountability activists.

That is, hundreds of people who deal with site location consultants, tax-dodging lawyers, and footloose companies every day think there need to be some serious rule changes.

This is a very mainstream sample: IEDC is the nation’s largest professional association of economic development officials: it has about 4,500 members (the vast majority in the U.S., despite its name) and the survey was conducted in January, with a reported 350 respondents. (As well, IEDC has corporate members, including site location consultants; no cross-tabs of responses by type of member are provided.)

Look at what they said (words in quotes come from IEDC’s January 18 summary, which does not reproduce the survey instrument and is member-password restricted):

98.6 percent said “incentives should be structured in such a way that the community receives a tangible return on investment (e.g., employment, capital investment).”

61 percent “believe location consultants’ compensation in a deal should be public information…”

In an open-ended comment section, “[p]erhaps the most frequent comment was that incentives practices are ‘out of control’…”

To be sure, despite these frustrations—and even though 57 percent said the frequency of incentive use is “too many,” the development officials responding generally don’t favor getting rid of subsidies. Instead they asked for help not getting snookered:

78 percent “responded that they approve of the practice of using financial incentives to influence business location decisions.”

But more than “80 percent responded that they or their peers or colleagues would benefit from more training in analyzing incentives deals.” Their most commonly requested new skills were how to calculate Return on Investment (ROI), fiscal impact, and the value of non-cash incentives.

“83 percent responded it would be helpful to have a set of guidelines or best practices for negotiating incentives packages.”

Without seeing the survey instrument, I am struck at how the responses all seem to overlook site location business basics: labor, occupancy, logistics, proximity to suppliers and customers, etc. That is, they apparently ignore the more than 98 percent of a typical company’s cost structure that is not state or local taxes and therefore cannot be influenced by subsidies. Clearly, some respondents believe that companies bluff and others said things like (quoted comment): “public monies are needed to provide public services and we shouldn’t be coerced into subsidizing large companies that don’t need the assistance.”

The development staffers also made it clear that politicians are no help. Many said there is a “‘general need in our industry for sharper benefit/cost analysis skills.’ Yet ‘a lot of times, elected officials don’t really care about the details of these numbers.’”

The IEDC survey has a second part, on the uses of subsidies, to be released soon. Clearly, this is a raw issue for Council members, especially those in smaller localities: last April IEDC published a guide on how to deal with site location consultants.

As someone who began training public officials on these issues in the late 1980s, I have seen a sea change in attitudes. Most feel trapped in a game whose rules they would never have written, and this IEDC survey attaches numbers to my takeaways.

So when will elected officials finally heed this consensus and start fixing the rules? If two-thirds of development officials agree it is unethical for site location consultants to pull down commissions on subsidies they negotiate, which state will step up and become the first to register and regulate these secretive, powerful players as lobbyists and thereby deny them success fees, a.k.a. commissions?

Oregon Gov. John Kitzhaber must have missed this month’s major New York Times investigative series on business subsidies. Less than a week after the nation’s paper of record reported that such subsidies are a “zero sum game,” Gov. Kitzhaber called the Oregon legislature into a one-day special session to pass the Economic Impact Investment Act, a corporate tax giveaway custom-tailored for Beaverton-based sportswear retailer Nike, Inc. The rushed deal and special session were announced last Monday, just four days before the legislature was to consider the bill, and a publicly available version of the proposed legislation was not made available until Tuesday.

HB 4200, which passed the legislature handily on Friday and was signed by Gov. Kitzhaber this week, allows Nike to determine its tax responsibility to the state through the controversial Single Sales Factor (SSF) apportionment method for the next 30 years, whether or not Oregon enacts tax reform during that period. Nike had expressed interest in expanding in Oregon, but the company reportedly expressed to the Governor that it needed “tax certainty” to commit to growing in the state. (Make sure to see the Oregon Center for Public Policy’s excellent take on what would constitute true “certainty” when it comes to taxes.)

In its original form, the legislation would have allowed the state to grant guaranteed SSF tax breaks through the Economic Impact Investment Act for a ten-year period, and those deals would have lasted for up to 40 years. The few accountability amendments passed during the one-day session shortened the amount of time the governor has to strike these tax deals to one year, while also reducing the period during which the tax break lasts to 30 years.

While the bill requires that Nike and any other company vying for the special tax deal invest $150 million and create 500 new jobs, it is silent on wages and other job quality standards. Significantly, the new law fails to set a meaningful term during which qualifying jobs must be retained by Nike or any other company approved for the sweetheart deal. It appears that the last 20 years’ worth of basic accountability reforms – now standard practice for most states – are unknown to Oregon’s lawmakers.

The lack of accountability provisions are not the only controversial aspect of the new giveaway. The Oregonian reported this week that despite the extraordinarily compressed period the legislature was given to consider the bill, the state has been secretly negotiating the deal, termed “Project Impact,” since last July. You can read the state’s non-disclosure agreement with a company called EMK (presumably a site location consulting firm contracted by Nike to pressure the state) here.

Oregonians are not the only constituency to express concerns about the new law. Intel, Oregon’s other major corporate employer, was reportedly involved in several heated exchanges with Nike over a particular provision of the original legislation that would have prohibited it from benefiting from the same deal based on the fact that it is already receiving considerable subsidies through Oregon’s Strategic Investment Program. Unsurprisingly, that provision was removed from the bill.

Oregon, unfortunately, has no such guarantees that economic conditions and fiscal obligations will remain exactly the same in the decades to come. There are no promises the state can make that protect its residents from change, and this new giveaway means that Oregon cannot rely equally on all businesses and individuals to contribute fairly in the future.

The recent announcement that Diebold, Inc. would be laying off hundreds of employees from its Ohio headquarters despite having received massive job retention subsidies designed by the state specifically for its benefit came as little surprise. (We’ve seen it before with Sears, Dell, Boeing, ad naseum.) The same day, Good Jobs First released “Paying Taxes to the Boss” a report in which we describe the disquieting economic development practice of states allowing employees’ personal income taxes (PIT) to be leveraged as corporate job subsidies.

Among the 22 programs we analyzed in our report is Ohio’s Job Retention Tax Credit (JRTC), which underwent controversial changes last year under the Kasich administration. At that time, both American Greetings and Diebold were considering relocating their corporate headquarters out of the state. In response to this job blackmail, Ohio legislators tweaked the JRTC rules to make the credit refundable for companies with a written offer of subsidies from another state.

In the end, Diebold signed a $55 million subsidy agreement (including $30 million in JRTCs) with the state in exchange for a promise to retain 1,500 workers and construct a new headquarters facility. The catch? Diebold employed 1,900 people in Ohio at the time the subsidy agreement was finalized. One year ago our prescient friends at Plunderbund correctly predicted what would come next – the state would be subsidizing Diebold while the company slashed its workforce. Last Thursday the company announced its intent to move 200 jobs to India, bringing its total state employment down to approximately 1,550 workers.

Diebold’s reasoning for seeking job subsidies from other states is a perfect example of how PIT-based programs accelerate the race to the bottom. The company claimed it was unable to compete after its chief rival, NCR Corp. relocated to Georgia with the assistance of the state’s Mega Project Tax Credit, yet another PIT subsidy spending program. (For descriptions of Georgia’s many personal income tax diversion subsidies, see “Paying Taxes to the Boss.”)

The use of workers’ personal income taxes as corporate giveaways fuels already rampant interstate job piracy. PIT diversions negate the benefits that economic development projects should have on diminishing state tax revenues. At this rate, it’s not even helping retain jobs in Ohio. The Diebold situation is proof of that. Lawmakers should not need more evidence that this is failed economic development policy.

Unfortunately, its failure to generate real economic development hasn’t stopped more states from adopting this foolhardy practice. Last year Oregon created the Business Retention and Expansion Program, a subsidy that will allow recipient businesses to receive the taxes of workers as forgiveable loans.

Credit: Made available through a creative commons license from Flickr user gardener41

For the latest evidence that unaccountable tax breaks fail to promote investment for job creation, shop at Sears—while you still can.

Gov. Pat Quinn’s signature had barely dried on the Illinois legislature’s lavish new tax-break deal to retain Sears Holding Corp.’s headquarters when the company announced store closures and layoffs. The deal, valued at up to $275 million in property and income tax breaks, was signed into law on December 16. Yet on December 27, the company announced that it would close between 100 and 120 Kmart and Sears stores.

Cynically, we note that the initial list of 80 closures does not include any Illinois stores, nor have any headquarters layoffs been announced… yet. But with Sears still losing market share, and reporting another decline in same-store sales (down 5.2% late 2011 over late 2010), how safe can Illinois jobs be?

We hate to say we told Illinois so. But as we forecast in our blog of last August: when a company is ailing and it asks for a tax break, the wisdom of the plant-closings movement tells us: tax avoidance can be one form of disinvestment, another early warning sign of job loss.

Put another way: if a company doesn’t see a future in the community or the state, why should it keep investing in the schools or roads or universities?

Indeed, inadequate reinvestment in Sears has been a major theme since hedge fund manager Eddie Lampert took control of the company. As the New York Times’ Floyd Norris pointed out in a December 29 column, between February 2005 and October 2011, Sears Holdings spent only $3.2 billion on capital expenditures (i.e., physical improvements) while taking $6.6 billion in depreciation charges (i.e., physical wearing-out).

A consumer behavior consultant with America’s Research Group told the Los Angeles Times: “They are not fixing their problems. The Sears apparel strategy is still not what the Sears customer wants. They have not spent the money to refurbish their stores to make the modern and contemporary for the under-35 shopper.”

Instead of reinvesting, Sears Holdings is reportedly soon to allow some its prize jewels, such as Kenmore appliances and Craftsman tools, to be sold by other chains such as Costco and Ace Hardware. Won’t that just further reduce traffic into Sears and Kmarts?

In lowering Sears Holdings’ credit rating, Fitch warned of “a heightened risk of restructuring over the next 24 months.”

Meanwhile, Illinois taxpayers, after giving Sears a retention package worth about $178 million in 1989 when it threatened to run away, have pledged up to $275 million more after a second runaway threat.

According to the FBI, the typical bank robber escapes with about $7,600. It would take more than 13,000 such capers to reach the amount that some individual corporations are netting in their own holdups, though of a legal variety.

This year has seen a series of cases in which large companies secure big subsidy packages by hinting that they may move their corporate headquarters to another state, and in several instances those packages have turned out to be worth an eye-popping $100 million.

The fact that state and local governments around the country continue to face severe budgetary shortfalls has not prevented them from offering—and companies from taking—these huge payoffs. Here are some new members of the $100 Million Club:

Motorola Mobility Holdings—one of the two spinoffs from the split-up of the old Motorola Inc. earlier this year—recently extracted $100 million in EDGE tax credits from Illinois as the price for keeping its headquarters and approximately 3,000 employees in the Chicago suburb of Libertyville. EDGE credits normally apply to corporate income tax payments, but the state legislature allowed the smart-phone company to keep employee income tax withholding payments instead. Motorola Mobility was awarded several million dollars more in job training and other grants.

When Panasonic Corporation of America let it be known it was considering moving its headquarters out of New Jersey, the state offered the company a tax credit worth just over $100 million to stay. But it couldn’t remain at its existing site in Secaucus. The Urban Transit Tax Credit required a relocation, so the state’s Economic Development Authority got the Japanese electronics firm to agree to move a few miles down the road to Newark. The arrangement was expected to provide a big boost in tax revenue for Newark (money in effect poached from Secaucus), but the struggling city for some reason decided it was necessary to give back a portion of that to Panasonic in the form of more subsidies, the amount of which has not yet been determined.

After raising the possibility of moving out of state in response to an increase of one half of one percent in local income taxes, American Greetings agreed in March to keep its corporate headquarters in northeast Ohio. All it took was a state package of grants, tax credits and low-interest loans worth an estimated $93 million over 15 years. Once the greeting card company settles on the exact site, it is likely to get additional local assistance that will put its total subsidies above $100 million.

A few weeks after the American Greetings deal, ATM manufacturer Diebold, which had made similar noises about a possible move to another state, was also induced to keep its headquarters in northeast Ohio. It, too, is slated to get total subsidies of about $100 million—$56 million in refundable tax credits from the state and anticipated local “incentives” of more than $40 million.

Sears Holdings could soon join the club as well. Actually, Sears is already a leader in it. Back in 1989 it got a subsidy package of $178 million for moving its headquarters from downtown Chicago to exurban Hoffman Estates, 29 miles away. The state and local tax subsidies from that deal are set to expire next year. Playing the we-might-move-out-of-state game, Sears has set off a frantic effort by Illinois officials to extend the company’s subsidies for another 15 years. No deal has yet been announced.

It is frustrating to see one company after another get away with job blackmail. If only we could get the FBI to take an interest in this kind of stickup.

CLAWBACK.ORG – A Blog of Good Jobs First

Clawback: a step taken by a government to recoup subsidies paid to a company that does not fulfill its job creation promises. Here we also deal with clawing back in a broader sense: making economic development serve the common good rather than narrow private interests.